Will Graphite be next on China’s Export Quota list?
I had interesting conversation yesterday with a very young (early 30s), uber-progressive president and CEO of a junior graphite explorer from my native province of Quebec. Obviously we discussed the graphite industry, his projects, the progress he and his team have made (and who they are possibly going to be achieving future milestones with in a possible JV capacity) and his vision for his company; however, we also touched on rare earth elements (REEs). Specifically, the recent WTO ruling against China in a case that was launched in 2012 by Japan, the European Union and the United States with regards to Chinese export quotas on its rare earth elements and how this ‘victory’ (no doubt subject to appeal) represents a short-sighted conquest that fails to address the critical (is ‘critical’ an understatement?) long-term problem of rest of world sustainability in the medium and heavy rare earths (the high-value REEs that are of critical importance to the high-tech industries, defense and renewable energy sectors). But this young CEO explained to me that, in his opinion, based on the dynamics of the Chinese graphite industry it was only a matter of time before similar resource nationalization policies go into effect for China’s graphite industry. And I think he’s right.
Before I begin, I should give you a bit of background. Carbon (graphite) is near and dear to my heart, but not for any financial reason, interest or consideration. Suffice it to say, I owe it a lot… more than you’ll ever understand. But more on that later. Although the recent posted prices of graphite have eased almost to half from their all-time highs of early 2012 (when it was selling at close to USD$3,000 per tonne (+80 mesh @ 94% to 97% carbon as graphite), I feel the long-term demand of the critical material (don’t take my word for it that graphite is ‘critical,’ the US government and the European Union classify it as such) is only going to increase. Furthermore, the relatively nominal annual increases in demand are not fair representation (or accurate) of potential future demand. The industrialization of emerging markets (and the resultant hundreds of millions of brand-new consumers who will be demanding smartphones, tablets and other electronic gadgetry that require lithium-ion batteries, for example), along with the with advent of renewable energy and electric vehicles and increased incorporation into society (according to Arnold Schwarzenegger and his good friend, United Nations Secretary General Ban Ki-moon, “renewable energy is the future for the world”).
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Here’s something graphite investors (or potential graphite investors) may wish to keep in mind in making graphite companies a part of your long-term (I emphasize long) investment portfolio. And please note, given the space restriction of this article, I will not address graphene, which is a forthcoming revolution unto itself, solely derived from high-grade graphite.
- Graphite is a critical component of lithium-ion batteries that simply cannot be economically substituted. Think all electronics that contain Li-ion batteries and the lithium-ion battery packs in hybrid and electric vehicles and motors. Remember that virtually all commercial Li-ion batteries contain graphite and don’t let the name fool you. There is 30 times more graphite than lithium needed to make each and every lithium-ion battery.
- Graphite is also a key component of vanadium redox battery technology that requires 300 tonnes (yes, that number is correct) of flake graphite for 1,000 megawatts of storage.
- One of the biggest demand drivers for Li-ion batteries are for electric and hybrid vehicles (each Tesla contains over 225 pounds of graphite, most other vehicles contain over 100 pounds of graphite), but it’s the increase in these vehicle sales that really blow me away. In 2004, over 150,000 electric and hybrid vehicles were sold. The number multiplied to 750,000 vehicles by 2010 and is, conservatively, expected to surpass 4 million vehicles sold by 2020 (45% are forecast to be hybrid electric, 37% battery electric vehicles and 18% plug-in hybrid electric vehicles). That is a lot of graphite and represents are far bigger annual demand than even the most liberal junior graphite explorers forecast.
- Smart Grids. The world’s power grids are grossly antiquated and will not meet future demand/need. That’s why they are being replaced with so-called smart grids. Tomorrow’s power grids will use computers to improve efficiency and flexibility of power distribution (from a multitude of sources). Smart grids utilize lithium-ion and vanadium redox batteries to adjust to fluctuations in power demand and production.
What I believe is important to understand is that the current easing in graphite prices does not, at all, reflect these significant high-growth applications noted above. Lithium-ion batteries have not yet had a substantial impact on demand and consumption. Graphite’s current price reduction is a reflection of slower growth in China and economic weakness in North America and Europe. With China being the (yet again) dominant supplier and producer of graphite (we only have one producing graphite mine in North America and, as I understand it, Timcal’s Quebec mine has less than four years of production capability remaining), we need additional sources, not only for sustainability (again, graphite is a critical material), but also to accommodate forthcoming increased demand. And a blind man can see that the rest of world will require more than a couple of graphite-producing mines. Despite what some analysts like to pontificate, graphite is simply not a case of whoever reaches production first will leave all the other juniors dead on the road. I believe we have to look beyond current 5% per annum increase in demand for graphite, focus on future demand (based on developing technologies and emerging-market demand) and realize the demand will be immense. Aside from graphite’s traditional uses in steel, automotive, refractories, lubricants, fire retardation, and plastics as well as Li-ion batteries and renewable energy; graphite will be needed for fuel cells, semi conductors and nuclear energy, as well. Many of those aforementioned applications have the upside potential to consume more graphite than all current uses — combined.
Rising production costs and falling prices may lead China to adopt the same export quotas it enacted on rare earths. China has indicated that the country wants to retain its resources, like graphite, for its own use – to manufacture higher-value products, meaning less material being available for export.
Pressures to implement export controls, like it has with REEs, signify a new era in China’s approach to protecting its domestic graphite reserves, which would undoubtedly have a significant impact on global supply. The implications for emerging graphite producers (and investors) are tremendous if China takes steps to protect its industry. Furthermore, China, like many other countries around the world is implementing green/sustainability initiatives and the growth for Li-ion batteries is expected to be explosive. Many analysts foresee buyers of graphite having no choice but to eventually find supplies elsewhere.
The fundamentals of graphite will not change anytime soon. Consider what graphite is used for and, more importantly, what it will be used for in the not-to-distant future. Then look at the supply situation long term. There is not going to be enough supply to meet demand.
In closing, why is carbon important to me? Simply put, it saved the life of my best friend – and no other substance in the world could have. Activated carbon (liquid graphite-like material) has been used for centuries to treat poisoning, the carbon is treated with oxygen to make it porous so that it can absorb hundreds of times it’s own weight and is one of the most effective life-saving remedies known to man…
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